The Problem of Doctors' Salaries

The United States pays more than twice as much per person for health care as other wealthy countries. We tend to blame the high prices on things like drugs and medical equipment, in part because the price tag for many life-saving drugs is less than half the U.S. price in Canada or Europe.

But an unavoidable part of the high cost of U.S. health care is how much we pay doctors — twice as much on average as physicians in other wealthy countries. Because our doctors are paid, on average, more than $250,000 a year (even after malpractice insurance and other expenses), and more than 900,000 doctors in the country, that means we pay an extra $100 billion a year in doctor salaries. That works out to more than $700 per U.S. household per year. We can think of this as a kind of doctors’ tax.

Doctors and other highly paid professionals stand out in this respect. Our autoworkers and retail clerks do not in general earn more than their counterparts in other wealthy countries.

Most Americans are likely to be sympathetic to the idea that doctors should be well paid. After all, it takes many years of education and training, including long hours as an intern and resident, to become a doctor. And people generally respect and trust their doctors. But they likely don’t realize how out of line our doctors’ pay is with doctors in other wealthy countries.

However, as an economist, I look for structural explanations for pay disparities like this. And when economists like me look at medicine in America – whether we lean left or right politically – we see something that looks an awful lot like a cartel.

The word “cartel” has some bad connotations; most people’s thoughts probably jump to OPEC and the 1970s crisis caused by its reduction in the supply of oil. But a cartel is not necessarily completely negative. It means that the suppliers of a good or service have control over the supply. This control can be used to ensure quality, as is the case with many agricultural cartels around the world. However, controlling supply also lets the cartel exert some control over price.

In the United States, the supply of doctors is tightly controlled by the number of medical school slots, and more importantly, the number of medical residencies. Those are both set by the American Council for Graduate Medical Education, a body dominated by physicians’ organizations. The United States, unlike other countries, requires physicians to complete a U.S. residency program to practice. (Since 2011, graduates of Canadian programs have also been allowed to practice in the U.S., although there are still substantial obstacles.) This means that U.S. doctors get to legally limit their competition. As a result, U.S. doctors receive higher pay, and like anyone in a position to exploit a cartel, they also get patients to buy services (i.e., from specialists) that they don’t really need.

There are two parts to the high pay received by our doctors relative to doctors elsewhere, both connected to the same cause. The first is that our doctors get higher pay in every category of medical practice, including general practitioner. If we compare our cardiologists to cardiologists in Europe or Canada, our heart doctors earn a substantial premium. The same is true of our neurologists, surgeons, and every other category of medical specialization. Even family practitioners clock in as earning more than $200,000 a year, enough to put them at the edge of the top 1 percent of wage earners in the country.

The other reason that our physicians earn so much more is that roughly two-thirds are specialists. This contrasts with the situation in other countries, where roughly two-thirds of doctors are general practitioners. This means we are paying specialists’ wages for many tasks that elsewhere are performed by general practitioners. Since there is little evidence of systematically better outcomes in the United States, the increased use of specialists does not appear to be driven by medical necessity.

In recent years, the number of medical residents has become so restricted that even the American Medical Association is pushing to have the number of slots increased. The major obstacle at this point is funding. It costs a teaching hospital roughly $150,000 a year for a residency slot. Most of the money comes from Medicare, with a lesser amount from Medicaid and other government sources. The number of slots supported by Medicare has been frozen for two decades after Congress lowered it in 1997 at the request of the American Medical Association and other doctors’ organizations.

Furthermore, Medicare exerts little control over the fields of specialization in the residency slots it supports, largely leaving this up to the teaching hospitals, which have an incentive to offer residencies in specialties from which they can get the most revenue per resident. This means they are more likely to train someone in neurology or cardiology than as a family practitioner.

Policymakers have a number of tools to use to introduce more competition, weaken the doctors’ cartel and get their pay more in line with counterparts elsewhere. One would be simply to fund more residency slots. Medicare could also limit the slots for many areas of specialization and instead insist that more of its funding go to train people as family practitioners.

A second route would be to end the requirement that foreign doctors complete a U.S. residency program in order to practice medicine in the United States. This means setting up arrangements through which qualified foreign doctors could be licensed to practice in the United States after completing an equivalent residency program in another country. The admission of many more doctors would put downward pressure on the pay of doctors in the United States, as insurers would have a new pool of physicians to add to their networks who will accept somewhat lower compensation.

Another approach is to not only change the rules around who can practice, but to change the rules around what doctors do. There are many procedures now performed by doctors that can be performed by nurse practitioners and other lower-paid health professionals. For example, many states now allow nurse practitioners to prescribe medicine without the supervision of a doctor, and there is no evidence that this has resulted in worse outcomes for patients. (It does, however, reduce health care costs.) The scope of practice of nurse practitioners and other health professionals can be extended in this and other areas for which they are fully competent. This would both directly save money and further reduce the demand for doctors, putting more downward pressure on their pay.

Yet one more approach is being tested in Missouri, Kansas and Arkansas: While a doctor can’t practice independently without completing a U.S. residency program, those states recently passed laws allowing foreign-trained doctors to practice under the supervision of a U.S.-trained doctor. This should also help to increase the supply of doctors.

The other major policy tool in reducing the amount we spend on doctors would be to reduce the use of medical specialists by changing the standards of care, the legal baseline that doctors and hospitals are expected to meet to avoid malpractice liability. This is largely a legal concept. While any licensed doctor can in principle perform any medical procedure, a family practitioner could be exposing herself to considerable legal liability if, for example, she gave a patient a heart exam that was typically performed by a cardiologist.

To get around this, it should be possible for doctors, hospitals insurers, and other providers to refer to the standards of care in other countries as a legal defense in malpractice cases. This would not be a protection against genuine malpractice; it would just mean that the use of generalists would not be evidence, by itself, of improper care.

There are enormous obstacles to any effort to reduce the pay of doctors. The restrictions that limit competition and keep physicians’ pay high are mostly obscure and not even understood by many policy wonks. Any efforts to change them in ways that seriously threaten doctors’ pay will encounter massive opposition from a very powerful political lobby. Furthermore, doctors generally enjoy a great deal of respect in society, and Americans tend not to think of their high salaries as part of the health care cost problem.

But if we want to stop paying a $100 billion premium for health care that doesn’t make us healthier, we’re going to need to overcome those political barriers. Getting U.S. health care costs down is a herculean task; getting doctors’ pay in line is a big part of the solution. It’s time we broke up the doctor cartel.

The fact that most people like their doctors will make the effort harder. Most of us like our letter carriers too, but that doesn’t mean they should make $250,000 a year.